Ratigan and Spitzer write: "There's a reason this is so inadequate to the problem at hand. For the last three years, the policy has been to impose a political solution to a math problem. It hasn't worked. America simply has too much mortgage debt to pay back."

Rachel Keyser and her daughter, Sydney, stand in front of their house in Deerfield, New Hampshire. (photo: Chris Arnold/NPR)

Mortgage Crisis: No Political Solution to a Math Problem

Dylan Ratigan and Eliot Spitzer, Reader Supported News

12 February 12

his week officials from the Obama administration, the banking regulators, and state Attorney Generals announced a settlement of claims stemming from the financial crisis. The nominal amount put forward as the cost of the settlement is $26 billion, and in return the banks will be released from civil claims on origination of mortgages and the falsification of documents in the foreclosure process, or "robosigning". This caps off a month of political noise on the housing situation which started at the State of the Union, when the president announced a task force on financial fraud headed by officials from his administration as well as New York Attorney General Eric Schneiderman.

An investigation, and a multi-billion dollar settlement. That sounds like a lot, until you put it into perspective. Here are the numbers. Roughly half of homeowners with mortgages are underwater, which means they owe more than they own, to the tune of $1 trillion or so. And housing values are still declining so far in this "recovery", throwing more homes underwater. In terms of an investigation, the Savings and Loan crisis used roughly 1000 FBI investigators to uncover fraud - this task force taking on a crisis forty times more severe will employ 10 FBI agents.

There's a reason this is so inadequate to the problem at hand. For the last three years, the policy has been to impose a political solution to a math problem. It hasn't worked. America simply has too much mortgage debt to pay back. Serious economic thinkers across the spectrum, from Democrat Alan Blinder to Republican Martin Feldstein to New York Fed President William Dudley, believe that there is only one solution - writing down the enormous creaking mound of debt. This solution is currently off the table, because writing down these unsustainable debts could cost our fragile banks enormous sums of money and possibly lead to a restructuring of one or more of our major banks. Avoiding this clear policy choice has resulted in our economy falling into a Japan-style "zombie bank" torpor, with debts carried on the books at full value which everyone knows will not be paid back at par.

This crisis of American political economy in the form of excess mortgage debt is preventing a more powerful economic recovery. Three years after Ben Bernanke used the term "green shoots" to describe a recovering economy, job growth hasn't really revived in any meaningful way. In fact, this is by far the worst recovery we've had since the end of World War II. The best way to measure this is not through traditional unemployment indices (which can be gamed), but by asking the question of how many Americans are working as a percentage of the population. In 2007, this was 63 out of 100. Today, it's a full five percentage points lower. The ratio hasn't been this bad since the early 1980s recession, and remember, we're in a recovery. And the labor force participation rate is dropping, which is a long-term bigger crisis.

The housing market's vicious deflationary cycle demands serious policy action to match the scale of the challenge. Dropping housing values lead to foreclosures, which damage housing values, and so on and so forth. According to Zillow, roughly half of homeowners with a mortgage are effectively underwater, which means they owe more on their mortgage than their house is worth. So far, the alphabet soup laden set of programs (HAMP, HARP, Hope for Homeowners) put forward by the Bush and then Obama administration have been failures. And this is because, as the Congressional Oversight Panel noted as far back as March of 2009, the single best predictor of default risk is how much equity homeowners have in a home. Many Americans, though considered homeowners, are essentially "renters with debt" (as housing analyst Josh Rosner put it). And Amherst Securities Laurie Goodman noted that with our current housing trajectory, we can expect up to 10 million more defaulted mortgages over the next decade. These foreclosures impacts housing values, reduce consumer purchases, and costs municipalities money.

The proposals on the table to solve this problem aren't inspiring. The meager mortgage settlement deal cut via furious and dramatic negotiations is unlikely to be meaningful. This settlement is essentially a continuation of previous alphabet soup housing programs, because it would not force banks to fundamentally restructure the trillion dollar underwater mortgage problem. It will generate headlines, but it will fail to address the extent of the problem. State attorneys generals have accepted the settlement for a variety of reasons, one of the most frustrating being that they are substantially under-resourced and this deal moves cash their war. This is not how to make good policy. And the housing market will continue to suffer if our political leaders cannot acknowledge the depth of the problem.

Instead, we need some serious discussion from both the Republican candidates and the Obama administration about how to write down mortgage debt. Some proposals would reduce principal, while giving the banks an equity appreciation stake in the home. Others would deal with the problematic accounting standards which allow banks to overvalue second mortgages, and imply that one or more large banks needs to be restructured by the government. These are worth considering. We think it's important, regardless of how policy-makers reduce the debt, to force the banking system to appropriately value mortgage debt.

Anything less would simply continue the deflation and uncertainty in the housing market.

Ultimately, we need to look at our banking and housing system and engage in a ruthless yet compassionate evaluation of whether it is working to solve our national needs. Serious thinkers in both parties recognize that it isn't, and that we should find a way to write down this mortgage debt. Only then will we head down a pathway to a healthier banking system, and begin generating the roughly thirty million jobs that will bring America back to full employment. It's time that the major presidential candidates, and President Obama himself, be honest with the American public, and openly recognize this as well.

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I wish the Hell that the Government AND "consultant" number-crunchers could see the housing crisis as possibly being part of a jobs recovery. Homes and neighborhoods are sitting rotting all over the country, often where they are most needed. Put small private Architects and contractors (desperately in need of work) back to work, funded by money recovered from the bankers who caused the depression and government-administered (I know, I know -could we trust them?), Renovate blocs in bid-packages, with vandal-proof facades, even solarize them with landscape designer, contractors and gardeners hired to envelope them in "Green" 'hoods with food -productive spaces for people to work, lots of light, sustainable planting and recycled drainage, small shops and food co-ops, pubs, coffee shops and some incentives to encourage small businesses to move in.And keep the meg-a corporate contractors out of it!As Lennon said,You may call me a dreamer but I'm not the only one--! At least I have some ideas instead of just sitting around saying "No, no, no -it won't work!" The main thrust of blunt, plutocratic-punditry in economic reasoning these days.

Two things contributed to the oversold, over mortgaged USA public. Realestate sales people selling the idea that buying a home is an "investment" rather than a place to live. The other significant outgrowth of this is the idea that, "if you need cash for other things", one can go and get a second mortgage based on the increased "value" of your "investment". That right away diminishes the net after-debt equity in the home. Home equity loans gave a false sense that this would all be taken care of by - the appreciating value of the "investment". It's been shown that Americans are about tapped out as far as borrowing capacity. The real estate sales persons have a stake in this phony mindset, as they earn comissions on the sale, then they're out of the way of the aftermath. With these overleveraged loans, then Wall Street started "buying" these loans internally, packaging them and selling them off to "investors" and secured by real estate loans. Also the investment bank folks in the big institutions were out of the way of the aftermath - they had their comissions already tucked away, done deal. I'm just saying that there is a clear path back in history to discover just where we are today. As a former bank regulator, it's rather easy to track the past events to see just how the country became overleveraged. When the "value" of their home "investment" tanked in 2008 onwards, robo closings and greed finished the job.

FINALLY an accurate description of the Banking Debacle! It's MATHMATICAL, Stupid! There IS no Political solution to the problem! Throwing a measly Twenty Five (25) Billion at people who were taken to the cleaners by the Banks isn't going to cut it. Especially after these alleged six (6) Banking Institutions were able to pay out $ One hundred forty four (144) BILLION cash Dollars in bonuses to employees, unless and UNTIL these Banks are made to REPAY citizens and restore their homes and livelihoods, it will NEVER be repaired. Holding the responsible parties to account will also go a long way in restoring America's faith in the Banking system. Currently, they can continue to Screw us with IMPUNITY, not to mention, IMMUNITY!

While all that is said is true, it leaves out some very important aspects of the debacle. The criminal ones. robo-singing was just the tip of the iceberg. There are many people who should be in jail for a long time and banks put into bankruptcy and glass steagle (sp?) revived.

People bought houses like the price of real estate would never go down and were looking at it like it was a money machine. Now they are stuck and whining. Buck up is my advise! The law should be made that the banks can not use 'underwater' as a criteria for refinancing. If you have made your payments, then you should be able to refinance. People being stuck? Tough s#*t!

If the notes were written down, it wouldn't just cost the banks. Much of these collateralized debt obs. were sold to pension funds of all the states and unions. The end result of this 'financial instrument' is to probably destroy the concept of retirement as we know it.

Why can't the Gov't simply pay off all the mortgages, thus saving both mortgager and mortgagee?It could then reissue downwardly revised mortgages covering EVERYONE who acquired a mortgage from an agreed upon date forward.The cost to the taxpayer would be the difference in price.The principal and interest on the reissued mortgages would ALL go to the gov't. The banksters should be cut completely out of the 'new' deal. They would have already received their pound of flesh when the gov't paid off the original mortgages; in fact they should be fined out of a good part of the excess profit.That should make us all happy.

The entire Economic meltdown has been an arithmetic problem all along. The reason we cannot figure our way out are the politicians, mostly Republicans, not following 3rd grade basics.

Like labels. Remember you 3rd grade teach told you to label your work, now you know why. The houses underwater problem should be simple to correct. Every loan taken on a house from the day MERS was started should be subject to a principal reduction, paid in cash or a simple rewrite of the mortgage. The amount is calculated by the dollars saved on all loans by using MERS divided evenly across all loans. That is for loans taken out from a MERS participating bank. Additionally, all mortgages will be reduced by the amount of the average loss in value by each voting precinct after inflation.

However, since the Righties keep labeling this as a problem created by individuals taking on more than they could afford, we will never get to the truth. That truth is that the housing boom and crash was the greatest wealth transfer ever, and it all went one way. Until we label it what it was, robbery, we will never solve the problem.

Right. How can we be expected to play if the banksters have cornered all the marbles?Isn't that what inflation is for?If the gov't can find some excuse to spread some newly created money (free us from the Fed!) to the plebs everything should work for a while; till the .01% gathers up all the new marbles and.. well, you get the idea.

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